Irrespective of which country we have been raised or are living in, we are taught to acknowledge that it is good practice to put money aside for retirement from the moment we enter into the work force. For example, in the US, the most common approach to retirement planning is the 401k plan that employers provide.  The premise there is to try to save as much as possible as early as possible. In the UK it appears that a more diversified yet traditional approach has been the trend: downsizing the family home when retirement age is reached as well as contributing to a defined contribution pension offered through employers.  The defined contribution plans however don't necessarily follow the same logic as the US 401ks, in that there is a point where you could invest too much too early and end up getting taxed at a higher level that would override the anticipated benefit.  The conclusion is that the differences in pension products and investment strategies between nations has a lot to do with each country's economy and government.

The economic reasons leading to the pensions reform 

In 2008, with the hit of the financial crisis on the global economy, established notions of wealth management, retirement planning and investments were about to be shaken up. The UK, like most other European nations, became faced with a liquidity issue. Banks weren’t (and arguably still aren’t) functioning properly, feeling the after-shock of the U.S.’ “Too Big To Fail” bail-outs.  Commerce in general fell into a dark place. Most people stopped spending on anything that wasn’t absolutely necessary. Austerity was felt throughout the country and the continent and has lasted for longer than most expected.

In light of the situation, the UK government made efforts to inject liquidity into the market; one of the ways to achieve this was to help jump start consumer spending. And everyone wanted to start spending again, after having suffered what economists call "austerity fatigue".  People no longer wanted to hold off big ticket purchases – a much needed new car, a family cruise, paying off an outstanding debt… that sort of stuff.  One of the measures taken to stimulate such consumer spending was the pensions reform announced in 2014 (and effected in 2015), which allows people over the age of 55 to access the entire pension savings.  The reform meant that it was no longer a requirement to place pension savings into annuities which effectively would drip feed the money upon retirement. So the reform meant that the new car could be purchased and the family cruise could be experienced before it was too late to be enjoyed. And the benefit to the economy has been felt almost instantaneously - money is circulating.

Is the pensions reform a blessing or a curse?

Some argue that such a significant change to a basic principle of wealth management presents an ethical question – enabling people to access savings set aside for ensuring they are able to afford their living expenses upon retirement at a time when people have a desire to "splash out" after having endured a long period of economising may indeed raise an ethical question of whether government should bear responsibility to ensure that citizens act responsibly with their money.

But what the pensions reform has provided (which in my opinion is a positive) is more choice and options to consider for retirement planning.  Although a portion of the recently released pensions may go to alleviate austerity fatigue, I'd like to think that most people plan to invest with the hope of adding value and ultimately ending up with a larger amount to spend in their later years.

Investment considerations for retirement planning

Apart from the traditional ISAs, the Enterprise Investment Scheme and the Seed Enterprise Investment Scheme appear to provide another alternative for the placement of recently released pension monies. The benefits to investing into EIS or SEIS companies or funds for retirement planning can be summarised as follows:

(1) The schemes offer inheritance tax relief which would be a strong attraction for a pensions placement. There are other incentives offered as well such as loss relief and capital gains tax deferral.

(2) Investing in start-ups or early stage companies can potentially be highly lucrative should they be successful. (However, it should be noted that the risk profile and the expected timing would need to be assessed for each investor).

(3) The schemes enable individuals to invest in companies that they truly believe in, whilst ensuring that they are getting a tax incentive (i.e. 30% income tax relief for EIS investments, and 50% for SEIS investments).

(4) The tax incentivisation offered can also be repeatedly obtained at the end of every three years of each placement, which would make such recurring placements more appealing in comparison to other types of investments such as an ISA which would provide a more passive investment strategy and therefore less tax incentivisation.

These are the main benefits as at current for investing in SEIS and EIS companies or funds. That is not to say that there may be restrictions imposed on the schemes in the future that would limit these benefits. For a more detailed overview of the schemes take a look at some of our prior blogs such as  "SEIS versus EIS - a visual comparison". I should highlight also that investing is very much dependent on the preferences of the individual, the amount of risk s/he is willing to take on, and the time line that s/he is working with. However, in light of the ever more complex retirement planning sector, the benefits that investment into these schemes provide should not be overlooked or underestimated.

Note that Sapphire Capital Partners is not promoting any product for investment or providing any form of investment advice.